Economic activity in the Second District continued to expand at a moderate pace since the last report. The labor market showed further signs of tightening, particularly for experienced office workers. Retailers indicate that sales were generally on or close to plan in May and that selling prices remained steady. Tourism activity remained high, though revenues have leveled off somewhat since the last report. Consumer confidence in the region slipped in May but remained at a high level.

Manufacturers report that activity picked up moderately in May, and that increases in both prices paid and prices received were about as prevalent as in April. Housing markets were mixed but generally firmer than in the last report, led by increased strength in and around New York City. Office markets in the New York City area were steady in April and May. Finally, bankers report increased demand for home mortgages, but sluggish demand for consumer loans; they also note continued tightening in credit standards, and an increase in delinquency rates on home mortgage loans.

Consumer Spending
Retailers report that sales were generally close to plan in April and May, with same-store sales running 2 to 5 percent ahead of a year earlier. Business was reported to be particularly brisk at New York City stores. Contacts note continued sluggishness in sales of home durables but indicate ongoing strength in apparel sales. Inventory levels are generally characterized as satisfactory, with one contact describing inventories as somewhat lean. Retailers indicate that selling prices remain stable.

The Conference Board's latest survey of Middle Atlantic residents showed confidence retreating in May, after climbing to a cyclical high in April. Tourism activity in New York City remained strong in April and May, though growth has leveled off since the last report, possibly due to capacity constraints. Hotels continued to run at close to full capacity, while room rates were up nearly 15 percent from comparable 2006 levels. Broadway theaters report that both attendance and revenues have held steady at high levels in recent weeks, and were up only modestly from a year ago.

Construction and Real Estate
Commercial real estate markets were mixed in April and May. Manhattan's office rental market remained exceptionally tight in May, despite some slowing in leasing activity: vacancy rates in Midtown and Downtown Manhattan were little changed near cyclical lows, while asking rents continued to climb, rising close to 30 percent ahead of 2006 levels. Conversely, suburban markets are described as somewhat slack--reflecting higher vacancy rates and only modestly rising rents--though there has reportedly been some recent pickup in leasing activity, attributed to tenants seeking cheaper back-office space. The commercial property sales market has been brisk in and around New York City, marked by high volume and substantial appreciation in prices--particularly in Manhattan and Long Island. In contrast, property sales and prices have generally been flat in the Albany, Rochester and Buffalo areas.

Housing markets have shown some signs of strengthening since the last report, particularly in New York City and parts of Long Island. After a brisk first quarter, Manhattan's co-op and condo market showed further signs of strengthening in April and May, according to both a major broker and a major appraisal firm. Prices have accelerated, sales activity has remained brisk and the number of listings (inventory) has continued to retreat, especially at the high end of the market. Manhattan's rental market is reported to be increasingly tight as well. The market for co-ops and condos on New Jersey's "Gold Coast"--across the river from Manhattan--and the market for vacation homes on Long Island are both also described as strong. However, market conditions in the rest of the District have largely remained sluggish: New Jersey homebuilders report that the market has stabilized at low levels, while New York State Realtors report that the housing market slowed in April.

Other Business Activity
A major New York City employment agency reports that hiring activity remained strong in May but that it has become increasingly difficult to fill jobs. This contact also notes that companies are very reluctant to give up seasoned employees and are frequently making counter-offers. Hiring has been particularly brisk in the financial sector, with strong demand from major Wall Street firms, medium-sized banks, and hedge funds. One contact also notes a recent pickup in hiring at commercial real estate firms. However, demand for workers from the publishing, advertising and consumer products industries is described as still sluggish. Starting salaries for college graduates are reported to be little changed from a year ago, but salaries for experienced workers have reportedly escalated.

New York State manufacturers report some pickup in growth in May, and express increasingly widespread optimism about the six month outlook. Firms also indicate steady increases in both prices paid and received. Regional purchasing managers report mixed but generally favorable conditions: Rochester-area purchasers indicate some deceleration in activity in May, while Buffalo-area purchasers note a quickening pace of growth. Incoming volume at the Port of New York and New Jersey is reported to have slowed somewhat in recent months, though shipping schedules for upcoming months suggest a brisker than usual pickup in July and August, when holiday merchandise typically arrives.

Financial Developments
Small to medium-sized banks in the District report little change in overall loan demand. In the residential mortgage segment, however, loan demand picked up, with more bankers reporting increases than decreases in demand for the first time in almost two years. Demand remained unchanged for commercial mortgages and industrial loans. Respondents reported declines in refinancing activity, though to a lesser degree than in recent months.

Bankers reported tightened credit standards, particularly on home mortgages. Respondents report that loan rates increased in the residential mortgage category but were unchanged in the other categories. Finally, more bankers report rising than declining delinquency rates on residential mortgages; however, little or no change in delinquencies is indicated in other loan categories.